Oil price shock could re-rank emerging markets

If oil prices stay where they are — or go even higher, depending on events in the Middle East — current short-term emerging market portfolio realignments could lead to a wholesale reassessment of investor risk.

Some clear winners and losers in emerging markets have already been thrown up by the spike in oil prices caused by unrest in the region, which has distracted investors from relative yields and valuations.

Oil-rich Russia, Kazakhstan and Venezuela are all attracting investor interest and strongly increased fund flows, while oil-poor Turkey and Chile are suffering.

“Anyone that’s got more oil is looking better at the moment, so oil exporters would benefit, and oil importers would not,” said Allan Conway, head of emerging equities at fund manager Schroders. “That’s one of the reasons Turkey is going down.”

Conflict in Libya and unrest in Bahrain and Saudi Arabia have driven oil above $100 a barrel to its highest since the collapse of U.S. investment bank Lehman in Sept 2008.

“It takes a while for many investors to move…we are due for a further reassessment,” said one emerging fixed income fund manager, who declined to be named.

BNP Paribas Investment Partners says it is overweight commodity exporters such as Russia in currencies and sovereign bonds, and underweight importers like Turkey.

Turkey imports 95 percent its total energy needs and if oil prices continue at current levels, Turkey could face an additional $10 billion bill for oil imports this year, finance minister Mehmet Simsek said last week.

In contrast, oil and gas accounted for 48 percent of budget revenues last year in Russia, the world’s top oil producer.

Turkey has until recently been a favourite of emerging market investors, due to its deft handling domestically of the global financial crisis.

But with the standard yardstick that a $10 rise in the oil price cuts 0.5 percent from global growth, Turkey’s growth trajectory is under pressure from rising import costs.